Prompted by a dismal response from MNCs with only about 30 applications coming in for adopting safe harbour mechanism for transfer pricing in its first year, the government is likely to appoint a committee for revising profit margins stipulated in the norms.
?High margins fixed in the norms notified in September 2013 appear to be the major reason for companies keeping away from the safe harbour window to avoid litigation,? said a senior finance ministry official.
The official added that equal number of applications have been received under the safe harbour rules (SHR) from Mumbai and Bangalore and few applications have also been filed in places such as Delhi, but the overall response to safe harbours is not encouraging,
An assessment report has been submitted to finance minister P Chidambaram who has asked the Central Board of Direct Taxes (CBDT) to analyse the reasons behind the poor response and suggest measures to remove the bottlenecks.
The official said that as higher profit margins, for example 30% in case of R&D, are playing spoilsport, a panel is likely to be constituted to revise the margins to make them realistic and acceptable.
There is also a view in the revenue department that when Advance Pricing Agreement (APA) window was already there in place, bringing safe harbour norms for so many areas was not a good idea. ?No country has safe harbour at this scale. Those opting for safe harbour can?t go for the Mutual Agreement Procedure (MAP). Then, earlier, even if the transfer pricing officer fixed a 30% profit margin for a company engaged in R&D for taxation, the margin got reduced by the appellate tribunals normally to 18-20%. Why should a company now accept 30% to begin with?? explained another official.
The safe harbour rules are better than APAs in the sense that once a certain minimum profit margin is declared as acceptable to the taxman, say, 15% or 18%, the taxman will not do a detailed audit of companies. This makes ideal for contract R&D or IT work offshored to India. But the rates have to be reasonable and this obviously needs to be fixed. While the Rangachary panel found IT companies were quoting profit margins of 15%, the taxman thought they should be as high as 24%.
Though the panel finally settled for a 20% SHR, this appears to be too high to gain traction. Similarly, in the ITeS sector, while companies with a turnover of under R500 crore were quoting margins of 15%, the transfer pricing officers on an average wanted 26%. The panel finally recommended 20%.
In case of contract R&D in the IT sector, the Rangachary panel took a middle path by fixing 30% as profit margin ? to balance the base rate of 20% and profit margins of some of the companies of as high as 50-60%.
The panel had noted that high variations in the margins declared by the companies ? 16.28% being the highest and 4% the lowest ? and also in the margins determined by the TPOs ? 108.02% being the highest and 5.67% the lowest ? was not conducive for fixing SHR margins. The new committee will have to take a fresh look at SHR margins to make them attractive for firms.
